The Governor of the Bank of England (BoE), Mark Carney, has slammed the rise of cryptocurrencies in a speech insisting that the huge price moves and volatility in cryptocurrencies like Bitcoin were “speculative mania” and costs to mine Bitcoin are “enormous.” But he insisted it poses “no material risk” to financial stability - at least for now.

While asserting that the time had come to “hold the crypto-asset ecosystem to the same standards as the rest of the financial system,” he argued that “elements” of this ecosystem should be regulated in order to “combat illicit activities” as well to promote market integrity and protect the safety and soundness of the financial system.

Even at their recent peak, the combined global market capitalization of crypto assets were less than 1% of global gross domestic product (GDP). And, as such, they are “small relative to the financial system” - even if they grew exponentially in 2017, he said.

As regards volatility, the Canadian economist noted that the “average volatility” of the top 10 cryptocurrencies by market capitalization “was more than 25 times” that of the U.S. equities market in 2017. And, Bitcoin was one of the more stable cryptocurrencies.

“This extreme volatility reflects in part that cryptocurrencies have neither intrinsic value nor any external backing. Their worth rests on beliefs regarding their future supply and demand - ultimately whether they will be successful as money,” he contended.

(Image: Shutterstock).

Delivering his speech virtually - due to the adverse conditions from the ‘Beast of the East’ blanketing the U.K. - Carney, an ex-Goldman Sachs banker and also Chairman of the G20's Financial Stability Board (FSB), told a conference in Edinburgh that energy consumption is worrying, declaring that current costs of electricity consumption used to mine the coins are “double the electricity consumption of Scotland.”

Indeed, on the costs of Bitcoin mining it was pointed out its current annual electricity consumption has been estimated by some to be up to 52 terawatt hours. This is double the electricity consumption of Scotland. By comparison, the global Visa credit card network’s energy use is less than ½ of 1% of that of Bitcoin, despite processing 9,000 times more transactions, it was said.

The U.K.’s top banker put forth the view that claims cryptocurrencies will replace fiat money like US dollars, sterling and euros are “tenuous at best.”

In his speech titled the The Future of Money to the inaugural Scottish Economics Conference held at Edinburgh University in the Scottish capital, Carney said that that coins don't pose a risk to the economy. However, he warned that authorities should be careful not to “stifle innovations.”

Regulation

In discussing whether to isolate, regulate or integrate cryptocurrency and their associated assets, the BoE Governor posited: “Isolation risks foregoing potentially major opportunities from the development of the underlying payments technologies.”

He added, “A better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system.”

Further, he said, “Even though their prospects of replacing fiat money are tenuous at best, cryptocurrencies are of growing interest to policymakers, many of whom prefer to term them crypto-assets expressly because they are not true currencies - a convention I will adopt for the balance of my remarks.”

Bank of England Governor Mark Carney speaks during the central bank's quarterly inflation report press conference in the City of London on February 8, 2018. (Photo: Victoria Jones/AFP/Getty Images).

Upside & Downside

The Canadian remarked, “On the upside, as I will come onto in a moment, some of the underlying technologies are exciting. Whatever the merits of cryptocurrencies as money, authorities should be careful not to stifle innovations which could in the future improve financial stability; support more innovative, efficient and reliable payment services as well as have wider applications.”

He added, “On the downside, at present, crypto-assets raise a host of issues around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion, and the circumvention of capital controls and international sanctions.”

In terms of how well cryptocurrencies fulfill the roles of money, Carney ventured that the answer has to be “judged against the functioning of the entire cryptocurrency ecosystem.”

This extends beyond the currencies themselves to the exchanges on which cryptocurrencies can be bought and sold, miners who create new coins and verify transactions and update the ledger, as well as the wallet providers who offer custodian services.

But he added, “The long, charitable answer is that cryptocurrencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. The short answer is they are failing.”

Poor Stores of Value

The BoE Governor said that cryptocurrencies are proving “poor short-term stores of value.” He pointed out that over the past five years, the daily standard deviation of Bitcoin was “ten times that of sterling.”

By way of example, he referred to a student taking out a £1,000 student loan in Bitcoin in last December in order to pay their sterling living costs for following year. “You’d be short about £500 right now. If you’d done the same last September, you’d be ahead by £2,000. That’s quite a lottery,” the Canadian said.

Transactions & Fees

While at present no major high street or online retailer accepts Bitcoin as payment in Britain, and only a handful of the top 500 U.S. online retailers do so, Carney noted that even if you can find someone willing to accept payment for goods and services in cryptocurrencies, “the speed and cost of the transaction varies but it is generally slower and more expensive than payments in sterling.”

He cited by way of example Visa, which “can process up to 65,000 transactions per second globally against just 7 per second for Bitcoin.”

“In contrast, Bitcoin users can face queues of hours. Those wanting to get to the front to make time-pressing payments - for last orders, for example - need to offer up a transaction fee sufficiently large to persuade Bitcoin “miners”, who verify and process transactions, to do so quickly,” he said.

The current fees on such crypto transactions stand at around £2 (c.$2.80), which had been significantly higher late last year (c.£40) was “expensive relative to cash, cards or online payments which cost the retailer around 1.5 pence, 8 pence and 19 pence, respectively,” Carney stated.

And, the central banker ventured that over timeBitcoin transaction fees could “rise further” due to the subsidy miners enjoy through being partly paid with rewards of new units of currency, will decline given that the total supply of Bitcoin cannot exceed 21 million.

Siim Õunap, an FX and crypto markets trader, said: “There is nothing new regarding Bitcoin being expensive and slow. This is a known fact to everybody in the industry.”

The Estonian added: “That, however, does not apply to cryptocurrencies in general as there are currencies out there that allow 100,000 transactions per second and others that have zero transaction fees. The only interesting part here is Bitcoin being used widely by ordinary people all over the world despite its disadvantages.”

In relation to crypto assets being less than 1% of global GDP, Õunap, who is also Chief Operating Officer at Savii Digital Corporation, a blockchain and crypto marketing agency, said: “It is a mistake to think that 1% of the global GDP is small relative to the financial system. Especially considering the fact that it was not even 0.1% year ago.

Though the concept of using cryptocurrencies as a financial instrument is still raw and further regulation is needed, it is definitely becoming a very strong alternative to traditional currencies, and this should not be underestimated.”

Money Laundering & Terrorism

Carney’s comments on terrorism and money laundering would appear to be in stark contravention to a report published by the U.K. Government. In December, the Treasury published a report entitled National risk assessment of money laundering and terrorist financing 2017, insisting there was a “low risk” of cryptocurrency in relation to both activities.

David Merry, CEO of cryptocurrency firm Investoo Group, reacting said he welcomed the Bank of England chief’s comments on blockchain, but insisted that there is a market for cryptocurrency despite Mr Carney’s scathing analysis.

“The speech was very considered and laid out some interesting research,” noted Merry. “I welcome the Governor’s comments on blockchain. It is excellent that he can see value in this technology, even if he has serious concerns over the rise of cryptocurrencies.”

That said, Merry posited that it was “confusing” that the Bank of England chief appeared to link cryptocurrency to money laundering and terrorism given that HM Treasury’s report appeared to be in “stark contravention” to these claims.

“I agree that cryptocurrencies pose no risk to the financial stability of the United Kingdom (U.K.). However, I think that over time as retailers look to adopt them for purchases they will become more prominent,” Merry said.

To date, only a very small proportion of the public in the U.K. have invested at this time. “From recent polling research we know that it’s mostly young people who have done so [bought crypto],” said Merry, whose firm last November acquired Bitcoinmag.de, an online community and information portal for the German speaking market run by crypto investors.

“It was interesting to learn that Mr Carney compared the rise of the currencies to the advent of the Internet. “Back in the late 1990’s no one could have imagined how much that innovation would change the world. And, experts were queuing up to say the ‘Internet’ would fail,” said Merry.

Only time will tell how cryptocurrencies and blockchain will change the landscape, as the Investoo Group CEO asserted “no one will be able to predict this accurately.” But the market and news flow will ultimately be determining factors.

“While aspects of his speech were in fact very positive, it is very much early days and it will be interesting to see how the market will react today,” Merry added.

Crypto-Asset Ecosystem

Referencing “anarchy may reign on the dark web,” Carney said that given structural vulnerabilities in cryptocurrencies, they are “inherently risky” compared to traditional financial assets, the authorities are right to be concerned over their inefficiency and anonymity. That cannot be condoned, he asserted.

While the Bank of England’s Financial Policy Committee (FPC), which identifies, monitors and takes action to remove or reduce systemic risks, is currently considering the risks posed to U.K. financial stability, the FSB will report to the G20 in Argentina later this March on the financial stability implications of crypto-assets. Watch this space.

A full copy of the Carney’s speech to the Scottish Economics Conference convened at Edinburgh University can be accessed here.

I am a freelance financial journalist based in London and former FT staff writer covering stock exchanges and transaction services. In recent years I have written for a number of trade titles like Futures & Options World (FOW), magazines such as the FT’s Investors Chroni...